Segmentation: 5 Poisonous Flaws & 5 Proven Antidotes

By Christopher B. Kuenne

Addressing this list will aid successful implementation.

It's no secret that marketing productivity in the financial services industry has fallen to critically low levels. Credit card offers stuff mailboxes nationwide as response rates drop ever lower. Ubiquitous telemarketing efforts for products such as credit cards and home equity loans have helped spawn consumer antipathy and "no-call" lists. Even cross-selling efforts directed at existing customers have not enjoyed the levels of success seen in some other industries.

Recognizing the problem, banking executives have embraced market segmentation — the idea that customers must be addressed in discrete groups, with the product, message and even channel tailored to the "hot buttons" of each particular group. Conceptually, this makes sense, but it often disappoints in practice. Why?

Our view is that segmentation is a valid concept tarnished by poor implementation. Many banks have gone to considerable expense to identify appropriate target segments for their products and services. But consistent problems have emerged in their attempts to "operationalize" these segmentation schemes.

Our client work suggests that five fundamental changes are required within a financial services institution's sales and marketing organization in order to operationalize segmentation. For each of the five "poisonous flaws," we recommend a proven antidote.

First and foremost, traditional behavioral modeling must be supplemented with approaches incorporating the underlying beliefs that drive consumer behavior. Second, the manufacturing-like process of campaign design and execution must be subordinated to deep consumer insights. Third, active and consistent high-level championing, from the chief marketing officer (CMO) and other C-level counterparts, is essential throughout the process. Fourth, quantitative targeting and marketing communication skills must be effectively melded at the operational level. And, finally, in order to measure performance at the very root levels of causality, the conventional, industry-standard metrics need recalibration.

This journey may be both strenuous and stressful, diverting the marketing organization from well-worn paths. But the results are worthwhile. Based on more than two dozen engagements with a dozen different financial institutions, our experience indicates that banks that effectively operationalize segmentation reap between a 20% to 150% increase in marketing effectiveness versus business as usual.

POISONOUS FLAW #1
Superficial segmentation.
PROVEN ANTIDOTE
Identifying the fundamental beliefs that drive observable behaviors.

Operationalizing segmentation cannot fully succeed unless segmentation itself is correctly structured. Our experience has consistently shown that discrete and identifiable consumer beliefs drive differential consumer behavior. Consider, for example, a distinct segment characterized by an underlying need for control in basic banking functions. Consumers manifesting this need will be voracious users of e-banking services requiring little to no personalized assistance. By contrast, consumers segmented by their lack of financial self-confidence will frequent brick-and-mortar branch offices, seeking assistance on even the most basic transactions.

Attempting segmentation without these belief-level insights is akin to attracting church congregants based on service schedule and location, while ignoring religious affiliation. Yet traditional approaches to segmentation have been largely behavior-based, focusing on surface-level tendencies, such as channel preference or demographic data, which includes age, income and family formation. These approaches tell the marketer what types of behavior are performed by whom. Yet they ignore the more fundamental question of why behaviors occur.

To answer this, marketers need a functional grasp of belief-level consumer needs and attitudes. Key attitudes may be the degree of personal confidence or of financial security. The bottom line in business, as in politics and religion, is that a core set of beliefs drives behaviors.

Correctly conceived and applied, this integrated approach to segmentation creates five to seven segments distinguished by underlying beliefs that determine important behaviors like brand choice and product usage. Fundamental beliefs, such as confidence, discipline, control, trust and loyalty, traverse lines of business. Yet, interestingly, individual consumers are characterized by different belief dimensions depending upon differing business lines. For example, many of the same consumers manifesting a need for control through e-banking usage may be disinclined to take similar control of their investment management services. In effect, then, they delegate that control to an expert advisor.

As a result, typing tools are vitally important in determining an individual's segment profile across a variety of product and service lines. This, in turn, illuminates the marketing hot buttons, channel preferences and price sensitivities that shape effective marketing programs segment by segment. In our client work, we find that building and selectively applying a suite of typing tools is more effective than a one-tool-fits-all-channels approach. For phone and Web-based marketing, where real-time interaction is possible, the typing tool can consist of two to four specific questions calibrated on a seven-point scale. For direct-mail approaches, where such interaction is not feasible, predictive tools based on secondary data must be used.

POISONOUS FLAW #2
Focus on efficiency over effectiveness.
PROVEN ANTIDOTE
Dethrone the process, declare the customer king and establish customer insight as coin and currency of the new realm.

Once a segmentation scheme has been developed, an organization must design a process for marketing on that basis. Marketing departments at most banks find themselves obsessed with efficiency as a way to offset declining effectiveness and budget constraints. These institutions have constructed mass production marketing factories focused on standardized high-volume output for allegedly homogenous populations. In the process, they ignore the diverse reality of variable consumer beliefs and preferences. Not surprisingly, identical mass mailings sent to hundreds of thousands or millions of consumers receive direct response rates of 25 to 75 basis points, while outbound telemarketing and e-commerce yields are lower and still declining.

In order to ensure a successful transition to segment-based marketing, the focus needs to be on understanding the beliefs that drive brand choice and product usage. The magnitude of this change is best illustrated in the fact that most marketing departments spend perhaps one or two weeks within the typical 20- to 25-week development period dedicated to a cross-sell campaign focused on understanding and capitalizing on the underlying drivers of consumer choice. The remainder of their time is consumed by the machinery-like process of list scoring and pulling, printing and distribution. The operational complexity of these mail factories has crowded out time for deep insight, de-emphasizing the targeting and tailoring process to rely entirely on modeling behaviors such as credit risk and/or response propensity. A truly effective campaign design must be driven from an understanding of consumer beliefs and motivations, creating engagement rather than simply transactions.

"Selling today needs to be more than a shotgun blast," advised John D. Hayes, chief marketing officer at American Express Co., in a recent keynote address to the Direct Marketing Association. "It needs to have the accuracy of a laser and the warmth of a hug."

In fact, these two objectives are closely entwined. Banks that embrace integrated segmentation, while elevating consumer insight over existing process, can and do achieve improved marketing accuracy and sales response. These programs, in effect, bring the horse to water, reminding him how and why to drink.

POISONOUS FLAW #3
Lack of executive sponsorship.
PROVEN ANTIDOTE
Enlist leadership, enroll rank and file.

Even if segmentation is designed correctly and marketed well, impetus may falter without the intervention of executive-level champions. That's because the changes we're advocating are difficult to implement.

Operational segmentation means reinvention of the core methods by which sales and marketing efforts are conducted. This includes changes in target, product and channel selection, in addition to key messages and offers. Without executive level sponsorship throughout, the transition to segment-based marketing often falters upon cultural and business process obstacles. Likewise, it treads on sensitive toes while traversing typically siloed functions.

C-level sponsorship thus entails much more than passive authorization. Vision in embracing the program and tactical support in disseminating it are equally vital components. Kicking off the operational segmentation project in front of the key managers in his lines-of-business, the CMO of J.P. Morgan Chase & Co.'s credit card division, Rajive Johri, put it this way: "There are few times in your career when you have the opportunity to redefine how your company competes, how you do your job and even how the industry as whole should and will work."

In this case, the CMO appointed a high-level lieutenant, with direct-line reporting, to oversee the ensuing project. Both worked to enlist support across key constituencies, which included decision sciences, credit risk, communications, and channel operations, among others. An initial segment-based test of a prior campaign helped build initial momentum. This "backtest" demonstrated the warmth, accuracy and consistency of integrated segmentation over and above the incumbent behavioral model.

Progress was then charted on a weekly basis as the pilot rolled out and accrued the promised gains. This further energized the organization, laying the groundwork for a successful scale-up of the operation with substantial impact on marketing productivity.

Even at the pilot stage, operational segmentation cuts across all marketing-related departments and functions. Within the pilot, small batch sizes confirm the effectiveness of the targeted and tailored marketing treatment upon each target segment. When proven more effective than the business-as-usual approach, the campaign is scaled up to the entire set of target segments.

Once fully adopted, the company must operationalize this new "test and learn" mentality. Now, for example, a larger number of smaller, distinct batch sizes comprise each marketing program. This increase in consumer-driven complexity necessitates a significant change in the way each department functions: from database marketing, marketing communications, legal review all the way through distribution. But without active C-level champions spanning the departmental divide, even the initial pilot may be sabotaged, deliberately or not, by resistance from any major stakeholder.

"I never think about 'The Consumer' anymore," one initially skeptical client told us. "My focus now is on segments, and the hot buttons for each segment."

POISONOUS FLAW #4
The cognitive divide between the left- and right-brainers.
PROVEN ANTIDOTE
Create marketing structure and processes designed to integrate Quants and Communicators.

Segment-based marketing also requires the melding of two modes of thought and analysis rarely found around the same watercooler. Traditionally, the left brain-oriented "Quants" from decision sciences build mathematical models based on observed consumer behavior and credit risk. They operate on a different wavelength from right brain marketing communications professionals, or "Communicators," who leverage intuitive understanding of consumer hot buttons to create the marketing messages. But in order to achieve the breakaway results that segment-based marketing has delivered, these two disparate skill sets must be combined within the same marketing teams.

To do so, CMOs first must hire bicultural managers, trained in each discipline, and give them responsibility to work across the traditional chasm. Second, the CMO must create an organizational structure and business process that explicitly integrates both skill sets. Most organizations follow a sequential model in their marketing programs, with the Quants drawing up the lists and the Communicators formulating messages. But optimal processes should be loop-shaped, not sequential, allowing each group's contributions to meld and complement the others.

The optimal marketing organization should be characterized by overlap, as in a Venn diagram, not divided by territorial lines. Communicators need involvement in the modeling process by defining target segments and championing the importance of actionable consumer insights from Day One. Quants need to understand the underlying drivers of consumer choice to continually refine the modeling process. To paraphrase Peter Drucker, the marketing objective is the same from any viewpoint: "Seeing the world as it is, not as you want it to be."

POISONOUS FLAW #5
Reliance on broad, insufficient or misleading measures.
PROVEN ANTIDOTE
Do the segments, then do the math.

Nearly every bank marketer can recite the virtues of rigorous forecasting, tracking and continuously refining marketing program tactics. But in the confessional, most would probably admit they do not systematically track the real effectiveness of marketing efforts and refine their tactics accordingly. Take churn rates as an example. The high number of checking account customers with less than 12 months tenure is a constant source of concern. Yet some customers are worth losing, others are worth fighting for. The fundamental issue is not overall churn, which is inevitable, but retention and ultimately wallet expansion among profitable customers.

Misleading metrics are one of the main obstacles that keep marketing departments from operating on a higher productivity plane. Cost per application/acquired customer (CPA), for example, is often considered the "ultimate direct marketing measure." Yet CPA ascribes an average marketing cost to all customers, despite enormous differences in profit and tenure. Likewise, cross-sell ratios justify the pushing of products at customers who may neither need nor want them. In the process, brand equity is diminished and customers rendered less receptive to future appeals.

By contrast, metrics recalibrated for rigorous tracking at the segment level can be readily linked to subsequent changes and improvements in marketing productivity. Goals in the annual marketing plan, and their associated tactics, should also be segment-based. Likewise, marketing management bonuses and ad agency fees should be tied into these same core metrics, and thus pointed toward profitable growth.

One segment-directed measurement we find consistently useful is the Demand Dynamic Funnel. In contrast to campaign CPA or average number of products held (the cross-sell ratio), the Demand Funnel indicates weak links in the marketing productivity chain. This is accomplished through quantifying, in percentage terms, how many prospects and customers lie within the footprint of the institution's sales and marketing effort at each successive stage in the awareness-through-purchase process.

For starters, consumers with some awareness of the company in the product area sit at the top of the funnel. The next level of measurement is a ratio of how many consumers from that universe are actively considering each competitor's products; then how many are actively shopping for products out of the larger consideration set; and finally how many become purchasers out of the larger shopping set.

The resulting ratios are then compared across competitors over time to determine which marketing programs are working and which are not. Why, for example, do a relatively large percentage of prospects aware of the company not actively consider the product, yet a comparatively high percentage of those who shop end up buying it? The weak link in this example occurs toward the top of the funnel where greater customer insight and effective messaging is required to compel higher levels of consideration. Strengthening this weak link will, in turn, have a multiplicative effect due to the higher shop-to-buy ratio.

Change is never easy. Yet within industries that have a long tradition of tried-and-true practices, broader transformation, rather than incremental adjustment, may ultimately be more successful. For any banking institution committed to raising marketing effectiveness, the challenge, then, is not simply adopting segmentation but adapting its operations to segmentation processes.

In fact, the success factors described above are more interdependent than discrete. A successful financial services competitor needs cultural and strategic change, as well as C-level championing, to integrate long-separated marketing skills. Likewise, executives will require real productivity metrics to retain a customer focus and keep process-driven marketing at bay. Yet, precisely because few companies are up to the complete segmentation task, institutions capable of creating these conditions will reap substantial advantage.

Mr. Kuenne is president and founder of Rosetta Marketing, Princeton, N.J.

Copyright © 2004 by Banking Strategies, published by BAI.

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